Indian markets are looking expensive and the continued inflows are being driven more by a desire to avoid underperformance rather than conviction in the fundamental story, say some of the leading foreign institutional investors (FIIs) invested in the India equities market.
After having net sold shares worth $8 billion in 2008, foreign investors have mopped up close to $12 billion worth of equities so far in 2009.
“Valuations are expensive (18 times FY10 earnings), relative to the rest of the world. But India’s growth story is more secure than many other countries. And there is a lot of liquidity in the world chasing growth. As such, institutional investors believe that the earnings growth and GDP are strong enough to sustain these valuations,” says Jyotivardhan Jaipuria, MD and Head-Research of BoA Merrill Lynch.
India has long been touted as being at an advantage, given that its growth is less co-related to that of the global economy. And with central banks around the world pumping in liquidity to kick-start their respective economies, the stock of money in the system has shot up drastically. With no return on deposits in any part of the world, there is a lot of money chasing the few growth economies.
But there are those who believe that this in itself calls for investors to exercise caution. “There is an element of risk in that if the newsflow is not as good as expected, the market may react adversely. The market needs pause to allow valuations to catch up with earnings growth. In the long term, this is good for markets,” added Mr Jaipuria. Sandeep Kothari, portfolio manager at Fidelity Mutual Fund is positive on the market but like most of his peers, is concerned about valuations.
“The economic cycle is turning and the business is strengthening. The question is how much markets have run up and what is in the price and what is not. One is worried you could see a last phase of frenzy like you saw in 2007. We are yet to see that kind of retail participation,” he added.
FIIs maintain that flows are unlikely to slow down till such time central banks start pulling back the stimulus money. There is a perception that markets are likely to surrender some of their recent gains before long. However, the general perception is that it is likely to be a gradual decline.
Whatever the case maybe, the recent upsurge has seen the Sensex overshoot most of the fair value targets set by foreign brokerage houses. While Citi had set a 15400 target for the Sensex, Deutsche Equities target was over 16000. “Our fair value Sensex target for the year is 16500. However, liquidity and high levels of risk appetite could lead the market to overshoot our fair value target in the short term. India remains a highly attractive market from a long-term perspective, offering a structural growth story,” said Abhay Laijawala, head of research, Deutsche Equities India.
After having net sold shares worth $8 billion in 2008, foreign investors have mopped up close to $12 billion worth of equities so far in 2009.
“Valuations are expensive (18 times FY10 earnings), relative to the rest of the world. But India’s growth story is more secure than many other countries. And there is a lot of liquidity in the world chasing growth. As such, institutional investors believe that the earnings growth and GDP are strong enough to sustain these valuations,” says Jyotivardhan Jaipuria, MD and Head-Research of BoA Merrill Lynch.
India has long been touted as being at an advantage, given that its growth is less co-related to that of the global economy. And with central banks around the world pumping in liquidity to kick-start their respective economies, the stock of money in the system has shot up drastically. With no return on deposits in any part of the world, there is a lot of money chasing the few growth economies.
But there are those who believe that this in itself calls for investors to exercise caution. “There is an element of risk in that if the newsflow is not as good as expected, the market may react adversely. The market needs pause to allow valuations to catch up with earnings growth. In the long term, this is good for markets,” added Mr Jaipuria. Sandeep Kothari, portfolio manager at Fidelity Mutual Fund is positive on the market but like most of his peers, is concerned about valuations.
“The economic cycle is turning and the business is strengthening. The question is how much markets have run up and what is in the price and what is not. One is worried you could see a last phase of frenzy like you saw in 2007. We are yet to see that kind of retail participation,” he added.
FIIs maintain that flows are unlikely to slow down till such time central banks start pulling back the stimulus money. There is a perception that markets are likely to surrender some of their recent gains before long. However, the general perception is that it is likely to be a gradual decline.
Whatever the case maybe, the recent upsurge has seen the Sensex overshoot most of the fair value targets set by foreign brokerage houses. While Citi had set a 15400 target for the Sensex, Deutsche Equities target was over 16000. “Our fair value Sensex target for the year is 16500. However, liquidity and high levels of risk appetite could lead the market to overshoot our fair value target in the short term. India remains a highly attractive market from a long-term perspective, offering a structural growth story,” said Abhay Laijawala, head of research, Deutsche Equities India.
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